RBC Capital has outlined key themes in the gold sector for 2023, noting that a more "constructive" price environment for gold could lead to increased activity in the industry.
The bank highlights five key areas to watch for in the coming year: commodity flows and asset under management support for gold and gold equities; a potential pick-up in M&A and financing activity; management of continued cost inflation pressures; ESG momentum and ‘evolving focus issues’; and recovery in junior valuations.
Firstly, RBC notes that recent strength in gold has been backed by robust precious metal fund flows totalling US$8bn in December, but cautions that higher levels could be fully priced into recent equity outperformance.
The bank suggests that should the strength be sustained, there may be a shift back to future production growth via junior developers and names with greater leverage and beta to the gold price.
Secondly, it anticipates more robust M&A activity in 2023 following a muted year, particularly if recent strength is sustained.
Historically, the bank notes that M&A activity has shown a relatively strong correlation with the gold price, suggesting that companies are more willing to transact in a positive price environment.
However, acquirers have been cautious as M&A has not been well received in recent years.
Thirdly, RBC notes that costs and capex have reflected a new reality weighing on spend and economics, as cost pressures have persisted with mine-site all-in-sustaining costs (AISC) increasing by 9% year-on-year, driven by rising input costs and skilled labour shortages, surpassing company budgeted expectations.
The bank expects inflation pressures to persist in 2023, resulting in more cautious exploration and growth spending to combat rising costs.
Fourthly, RBC highlights that ESG within the mining sector is continuing to gain momentum, backed by growing index weightings, with emissions remaining the top priority, but water and biodiversity gaining in importance post-COP15.
Finally, RBC notes that the junior gold sell-off has reversed course, with potential for further upside on valuations.
Junior developers sold off significantly in 2022, but the bank suggests that current valuations of US$42 per ounce of gold in the ground sit well below the US$55/oz average in 2021 and $67/oz in May 2021.